Finding the Down Payment for Your Investment Property

Mortgage News from Quicken Loans

You've heard that investing in property can be quite profitable. Whether you plan to flip it (buying a property, fixing it up, then selling for a profit) or rent it out, real estate is a way to expand your investment portfolio and generate increased cash flow.

But even when you know what kind of property you want to buy and how you want to manage it, you have to find a way to finance the purchase. Granted, there are many no down payment mortgages available, but if you decide to put a down payment on the property, you have to know where to come up with the money. You also need some cash to close on the property, then you have to be able to make the monthly mortgage payments. So where do you start?

You could start with your savings, but wisdom says your savings are better left where they are. Even if you use some of your savings, you never want to dip too deep into that pool, else you risk losing your financial cushion. So where else can you look?

One smart place to get the money would be to tap into your home equity. If you've built up some equity in your primary home, you can get a home equity loan that will give you the cash to use as a down payment.

There are several advantages to home equity loans. The first being that where traditional first mortgages can take weeks to close, a home equity loan may take only several days. The second is that the mortgage interest is tax-deductible. (You should always check with your tax advisor.) And third, home equity loans offer flexibility--some are even available with interest-only payment options where you can choose, when you want to pay only the interest due for that month; though you can still pay as much principal as you want.

Now that you've found a way to finance the down payment, how do you finance the rest of the investment property? There are several loans available that are good for the purchase of an investment property. Some loans allow you to state your income, meaning that you don't have to document your income. It makes the mortgage process easier because there is less paperwork, but you need to have a good credit score to do so.

Then, there are option ARMs that allow a significantly lower monthly payment. In fact, option ARMs give you just that--options. You can choose a 30-year traditional mortgage payment, a 15-year payment, an interest-only payment or a minimum payment, where you pay less than the interest due for that month. This kind of payment becomes very handy when you're juggling a mortgage for your own home as well as an investment home. Just be careful which option ARM you choose--many have rates that can adjust very quickly and very often. Look for an option ARM that offers a fixed interest rate, that doesn't allow you to defer too much interest and doesn't have pre-payment penalties.

Coming up with a down payment to buy an investment property doesn't have to be hard, especially when you don't want to dip into your savings. Neither does financing the rest of the property. However, everyone's situation is different. Speak to an experienced mortgage banker to find out which mortgage best fits your individual situation and investment goals.

This article is reprinted by permission from Quicken Loans © 2006 Quicken Loans Inc. All rights reserved.